U.S. May Sanction India If It Doesn’t Cut Iran Oil Imports

Obama administration officials say they are worried India may run afoul of a new U.S. law restricting payments for Iranian oil, forcing the White House to impose sanctions on one of its most important allies in Asia.

So far this year, India is failing to cut back its purchases of Iranian oil, which may force President Barack Obama to impose penalties as early as June 28, according to several U.S. officials who spoke on condition of anonymity because of the sensitivity of the issue.

The law, which targets oil payments made through Iran’s central bank, applies in any country that doesn’t make a “significant” reduction in its Iranian crude oil purchases during the first half of this year. If India fails to sufficiently cut Iranian imports, Obama may be compelled to bar access to the U.S. banking system for any Indian bank processing oil payments through Iran’s central bank, the officials said.

“Given the level of trade, and in particular oil, between Iran and India, targeting an Indian entity that facilitates Iran’s access to the international financial market should be top of mind for the U.S. Treasury,” Avi Jorisch, a former Treasury Department official who is now a Washington-based consultant on deterring illicit finance, said in an interview.

The U.S. government may not be aware that India’s biggest buyer of Iranian oil, state-owned Mangalore Refinery & Petrochemicals Ltd., plans to import less from Iran starting next month, according to two officials with direct knowledge of the matter who spoke on condition of anonymity because they weren’t authorized to speak. The officials said the planned cuts follow increased U.S. pressure in recent weeks.

Iranian Crude

India bought an average of 328,000 barrels a day of Iranian crude in the first six months of last year, making it the No. 3 buyer, behind China and Japan and ahead of South Korea, according to the U.S. Energy Information Administration. Iran is the No. 2 producer in the Organization of Petroleum Exporting Countries.

Oil Minister S. Jaipal Reddy, Finance Minister Pranab Mukherjee and Foreign Secretary Ranjan Mathai have said India will continue to buy Iranian oil to meet its growing energy needs. While the Indian government has an excellent record of enforcing United Nations sanctions on Iran, India has objected to unilateral U.S. sanctions, according to U.S. officials.

“We abide scrupulously by UN authorized sanctions,” Indian Foreign Ministry spokesman Syed Akbaruddin said in a phone interview. While restrictions imposed by individual countries “have an impact on commercial interactions, from a legal perspective there is nothing that binds us to follow them.”

Oil Purchases Rise

The latest shipping data shows India and South Korea sharply increased oil purchases from Iran in January, according to a report released yesterday by the International Energy Agency in Paris. China halved its imports from Iran, from 550,000 barrels a day in December to 275,000 barrels a day in January, following a dispute over pricing terms that has now been resolved, the report said.

The new U.S. law targeting Iranian petroleum transactions doesn’t specify by what percentage a nation must reduce its Iranian oil imports to qualify for an exemption from sanctions. U.S. officials, speaking on condition of anonymity, said they are looking for cuts of around 15 percent in volume, though they might consider whether buyers have extracted significant price discounts, thereby depriving Iran of revenue.

Mangalore Refinery may cut its contract to 6 million metric tons, or 120,000 barrels a day, in the year ending March 2013, which would be a 15 percent cut from the previous year, one of the people with knowledge of the planned reductions said.

U.S. Offer

The U.S. has offered India help in brokering deals with alternative suppliers including Iraq and Saudi Arabia, which has offered to replace any shortfall, according to U.S. and Indian officials.

Envoys from the White House, State Department, Treasury Department and the U.S. Embassy in India have had numerous conversations with Indian counterparts since Congress began debating the sanctions measure that Obama signed into law Dec. 31.

Nancy Powell, the Obama administration’s ambassador- designate to India, testified before Congress last month that, if confirmed, she would be “spending a great deal of time” working with India on Iran sanctions issues. She quoted Mathai, who came to Washington for meetings last month, as saying India is working to diversify its sources of petroleum and reduce its dependence on Iran to no more than 10 percent of its total oil imports.

“That would be a very good sign,” Powell said.

Disrupting Shipments

U.S. and European Union sanctions are already disrupting Iranian crude shipments to global refiners, contributing to a 16 percent advance in London-traded Brent this year. Brent oil for April settlement fell $1.25, or 1 percent, to end the session at $124.97 yesterday on the London-based ICE Futures Europe exchange.

China’s Ministry of Foreign Affairs has criticized sanctions on Iranian oil. China’s crude imports from Iran hit their lowest level in five months in January, customs data show, as the country’s biggest buyer, China International United Petroleum & Chemical Co., known as Unipec, delayed signing a new contract because of a dispute over payment terms. Unipec cut its 2012 term contract purchases by 15 percent from 2011, though the payment dispute has since been resolved.

For their part, Japan and South Korea are seeking exemptions from the new U.S. sanctions. If both nations can demonstrate a significant reduction in their purchases by the end of June, their banks would escape penalties, according to two U.S. officials involved in the talks.

Japan is seeking to reduce its crude purchases from Iran by at least 11 percent, according to a Japanese government official interviewed Feb. 21. The three largest Japanese buyers of Iranian crude are Showa Shell Sekiyu KK, JX Nippon Oil & Energy Corp. and Cosmo Oil Co.

Critical Partners

The South Korean government has said it will make a decision on cutting Iranian crude imports by the end of June. South Korean officials denied reports saying they had already proposed cutting imports by 15 percent to 20 percent.

The White House doesn’t want to punish Japan, South Korea or India, critical U.S. partners in trade and security and important regional counterweights to the rise of China, U.S. officials said. Still, the president has limited leeway to grant exemptions under the law, and so far, India has not demonstrated reductions, they said.

Mark Dubowitz, executive director of the Foundation for the Defense of Democracies in Washington who has advised the administration on sanctions, said India shouldn’t assume it will avoid sanctions unless its refiners demonstrably reduce imports over the next three months.

There’s no reason “why India should be given a free pass as the EU, Japan and others significantly reduce the scale and scope of their Iranian trade,” Dubowitz said in an interview. “No country should be confident that it will not be the target of U.S. sanctions.”

‘Irritant at Best’

Other analysts said Indian officials have responded to U.S. pressure by quietly pressing state-run refiners to switch to alternative sources, and they expect the U.S. will reach an accommodation with the world’s most populous democracy.

“It’s highly unlikely that the U.S. would sanction India on this issue. The Iran issue is an irritant at best,” Harsh V. Pant, a specialist on India and Iran at King’s College London, said in a telephone interview.

The Iranian central bank sanctions that Obama signed into law Dec. 31 are part of a larger effort to deprive the Persian Gulf country of its leading source of revenue and complicate Iran’s commercial ties with the outside world. The U.S. and the EU have piled on new sanctions since November in an effort to pressure Iran to abandon any work it may be conducting to acquire a nuclear weapons capability. Iran insists it nuclear program is strictly for civilian energy and medical research.